Category: Investing

Americans are out of work. Factory orders are sluggish. The economic news is grim yet the U.S. stock market keeps going up. Can this be consistent? Sure! It is possible to believe simultaneously that the American people are getting poorer and that the largest American corporations are going to get ever richer. How could this happen? Group A and Group B can get richer if they work together to grow the pie. Alternatively, Group B can get richer by transferring wealth from Group A.

We’ve discussed this already in this blog in the context of airline CEOs who managed to take $billions in taxpayer money and transfer quite a bit of it into their personal checking accounts as salaries, bonuses, guaranteed pensions, etc. But there are more subtle ways in which corporations can acquire property formerly held by the public.

For example, movie studios (notably Disney) and other corporate copyright holders recently purchased a federal law that extended copyright out to 100 years (the Founders had it at 14; it was 75 years until recently). There was no way for them to argue that this law would provide an incentive to authors because it applied to works that were created in the 1920s, i.e., whose authors had been dead for half a century or more. The effect of this law was to transfer public average-Joe property (public-domain works) into the hands of large corporations, i.e., the companies whose shares are going up.

Disney figures in another corporate property transfer. Ever since the dawn of aviation it has been held that airspace belongs to the public and is to be regulated for the benefit of all by the FAA. This is what, for example, prevents the owner of a farm in Missouri from demanding that Delta Airlines pay him a tax every time they fly over his farm. In May of this year that changed for the first time. Disney essentially now owns the airspace over Disneyworld and Disneyland and they can exclude anyone from overflying. They’d been trying for years to exclude planes towing advertising banners but Sept. 11th gave them a security rationale (though neither the TSA or the FAA felt there was a security risk or wanted to transfer the airspace into private hands). Background story: http://www.aero-news.net/news/sport.cfm?ContentBlockID=9601

Let’s hope the comments section will fill up with other examples of this trend. But the bottom line is that the time seems ripe to invest in the S&P 500. Look around you at stuff that you believe to be public property. Very likely it will soon be given away to America’s largest corporations and consequently their stock will go up even if they don’t innovate.

If you put money blinding into stock index funds, you’re helping managers steal from America’s public corporations, according to a special issue of Fortune magazine (start here and then click on the other articles under “special package”). Could it be that the great investing lesson we learned from the last few decades, i.e., that index funds outperform managed mutual funds, will turn out to be inapplicable to the changed environment of the 21st century?

The Wall Street firms will pay $1.4 billion for their sins of the 1990s, under a settlement reached yesterday. It seems that they instructed their analysts to recommend buying the stocks that their investment bankers were taking public (for a fixed 7 percent share of the proceeds that seems to have been as unaffected by competition as the 6 percent collected by realtors). This happy marriage resulted in an explosion of profits for Wall Street throughout the 1990s.

How discouraged from defrauding investors are they going to be in the future? According to the New York Times, Citigroup paid $400 million or 0.2 percent of their organization’s value (about $200 billion according to finance.yahoo.com). Merrill Lynch paid $100 million or about 0.25 percent of its market capitalization.

Let’s figure out what this would be like for the average American family, whose median wealth was $63,000 in 2001 (before the economy collapsed). 0.2 percent of $63,000 would correspond to one of the family members being fined $126, less than one-third the cost of the average speeding ticket (including insurance hikes) in the U.S.